Commodities hold on

The stratospheric rise in commodity prices has largely been met with disbelief and skepticism. Yet, the iron ore price remains around US$220/ton while other commodities have been buoyant as well (copper, nickel etc).

A lot of the strength has been to do with stimulus in China coming out of the CV-19 shock. But to my mind, an underrated factors has been the increase in money supply around the world due to central bank actions. This is the ‘money illusion’; i.e. if there is twice as much money supply, prices will be twice as high. There’s no doubt money supply has increased significantly over the past 12 to 18 months. As an example, money supply (M0) in the US increased from roughly $US3,500,000 million pre CV-19 in early 2020 to 6,041,900 million currently – not far off doubling.

Is there any wonder we have seen inflation and asset prices go up? A major driver of the 5.4% annual official inflation figure in the US has been an increase in the price of used cars (by circa 45% p.a.). Are the used cars worth more or is the currency worth less? Similarly, the crazy house price increases seen around the world make more sense when we consider the money creation that has taken place and the record low borrowing costs.

Seen in this lens, the commentators expecting a normalisation of the iron ore price to under $100/ton are playing yesterday’s game, in my opinion. This isn’t 2014/15 anymore (the last time the iron ore price crashed, down to US$40/ton), this is a very different world and I suspect we are not going back.

Commodities have been one of the few remaining areas of value in the market in 2021 in my view. I’ve been buying into resource stocks in recent months as I’ve seen them as the best value. We are also moving into dividend season after what should be a record earnings season and I’m expecting some huge payouts. BHP is one I’ve been adding to this year, which hit a new high on Friday not far off $52.

Commodities hold on

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